1. 22 March 2012
Update
India Financials
RBI releases guidelines for gold financers; LTV cap of
60% to impact business growth and margins
RBI released the guidelines for gold lending NBFCs. Key changes announced:
1) capped the LTV at 60% for loan against collateral of gold
2) increased the minimum Tier I capital requirement from 10% to 12%
(however effective from April-2014)
3) made it compulsory to disclose gold loan as a percentage to total assets,
and
4) disallowed NBFCs to lend against bullion/gold coins.
With the guideline for LTV Cap being effective on a prospective basis, it will
not have implications on existing portfolio. However, it would have a
negative implications on business growth and margins, going forward. With
lower LTV, yield on portfolio is expected to come down impacting margins.
Further, NBFCs would have to generate higher volumes to compensate for
the loss in value which would be a challenge from perspective of business
growth.
LTV Cap of 60% to impact margins and business growth
Concerned over the hyper growth in gold financing segment RBI has
introduced LTV Cap of 60% on loan against collateral of gold from
prospective basis.
Implications
The LTV for Manappuram is around 68% and for Muthoot its is already
around 60%.
While current guidelines does not have any implication on existing portfolio,
there would be some negative implication on incremental disbursement for
gold financing companies and margin.
Lower LTV would require NBFCs to generate higher volumes to compensate
for the loss in value, so as to keep the growth momentum going, which
would be a challenge.
With loan being secured and LTV being lowered to 60% or less, incremental
yield on portfolio is expected to come down, which would impact margins
(though the exact impact is not quantifiable currently). For instance 20% of
the portfolio of Manappuram is above 80% LTV wherein the interest rate
charged is 25%+ and in case of loans with LTV of 50% interest rate is ~18%.
While the yield on current mix will not be impacted with lower LTV
incremental yields would fall.
Increasing Tier I cap requirement to cap leverage
Effective from April-2014, gold financing companies are required to maintain
minimum tier I capital requirement from 10% currently to 12%.
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2. India Financials
Implication:
The guideline in terms of increasing Tier I capital to 12% (to be achieved by
April-2014) is in line with recommendations of the Usha Thorat Committee
and is not a negative surprise.
Currently, NBFCs are mandated to maintain a total capital adequacy ratio of
15% with minimum Tier I Capital of 10%. An increase in the tier I capital ratio
would call for setting aside higher capital, which would also curb their ability
to leverage.
Although both Muthoot and Manappuram currently have their tier-I ratio
well in excess of 12% viz. 13.4% and 18.4% respectively and may not have to
raise fresh capital in a hurry, reduction in leverage could affect growth and
return ratios.
Key takeaways from Manappuram concall
The rationale for the change in LTV Cap could be to create buffer against
volatile gold prices and to increase buffer for the same.
The change in guideline would have some negative implication in medium
term. However, over a long term perspective it would bring about
consolidation in the sector and create entry barriers which would be
beneficial for established players like Manappuram and Muthoot.
The guidelines are ambiguous in terms of calculating the price of gold
collateral i.e. it is unknown as to whether making charges are applicable and
if spot price or average price need to be considered thereby clarity needed to
be sought by RBI, before it get effected.
There would be near term impact on margins although in medium-term, with
risk perception expected to recede, borrowing cost would be lower and thus
negative impact on margins would be contained.
Manappuram does not lend against bullion and have a very insignificant
exposure to loan against gold coin. As a result, the impact of RBI disallowing
NBFCs to lend against bullion and gold coin would be very limited.
Highlights from Muthoot press release
22 March 2012
With the industry attracting various new entrant due to robust growth in the
industry, steps taken by RBI with respect to capital adequacy and LTV is
driven by the fact that they want to strengthen the sector with robust
operating practices and increase risk control measures.
Muthoot currently complies with LTV of 60% as its AUM is ~INR240b with
approximate value of jewelry that it posses is ~INR400b. Further as a
cautious measure the company has been progressively reducing lending rate
per gram as a risk management measure for past couple of month.
As on Dec-11, Muthoot had a Tier I Capital of 13.4%, thereby increasing of
the minimum Tier l capital requirement to 12% by RBI will not have any
impact. Further RBI has provided time till April-14 to comply with the
minimum Tier I capital requirement which provides comfort.
The company lends only against gold jewelry, thereby change in guideline by
RBI of prohibiting lenders to give loans against bullion/ primary gold and
coins will have no implication on Muthoot.
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4. India Financials
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22 March 2012
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